The debate around Goods and Services Tax (GST) on insurance has once again taken center stage. At present, an 18% GST is applied to both life and health insurance premiums. Many experts argue that this heavy tax makes insurance costly and discourages people from buying policies. With the GST Council set to review the matter soon, there is growing hope that a change could make insurance more affordable. But the real question is—will the exemption truly benefit the ordinary policyholder, or will it get absorbed by insurers in higher operating costs?
India is one of the world’s fastest-growing economies, yet the share of insurance in our GDP remains worryingly low. In the financial year 2024, insurance penetration was only 3.7% of GDP. This is much below the global average of 7–8%. Life insurance accounts for 2.8% of GDP, and non-life for just 0.9%. In fact, penetration has even fallen compared to the Covid period, when it briefly touched 4.2%.
For a country of 1.4 billion people, the number of individuals covered under insurance remains far smaller than in developed nations like the US, UK, or Japan, where insurance coverage is nearly universal. One of the biggest barriers is affordability, and here the role of GST cannot be ignored.
At 18%, India’s GST on insurance premiums is among the highest in the world. In contrast, many countries either exempt insurance altogether or apply very minimal rates. For example, in the UK, US, and Australia, there is either no such tax or very limited levy on life and health insurance. This global comparison puts pressure on Indian policymakers to rethink the current structure.
The Group of Ministers (GoM) has already recommended a full GST exemption on life and health insurance premiums. This proposal will now be presented to the GST Council for final approval. On paper, this looks like a win for consumers. The expectation is that removing GST could reduce premiums by up to 15%, making insurance more affordable and encouraging more people to buy coverage.
However, the reality may be more complicated. Insurance companies have repeatedly pointed out that if premiums are exempted from GST, they lose out on input tax credit (ITC). Insurers spend heavily on advertising, marketing, agent commissions, and administrative expenses. Currently, they can claim credit on the GST paid for these costs. But if premiums are exempt, insurers will not be able to claim this credit anymore, meaning their operating costs will rise.
As a result, instead of passing the entire benefit to consumers, insurers may absorb a large part of it to cover their higher expenses. Analysts suggest that instead of a 15% benefit, the actual reduction for consumers may only be around 6–7%. This would not solve the affordability issue to the extent the government desires.
Another technical aspect is the difference between exempt supply and zero-rated supply. While both are taxed at 0%, only zero-rated supplies allow businesses to claim input tax credits. Exempt supplies, on the other hand, add hidden costs for businesses, as they cannot claim back the GST paid on their expenses. Placing life and health insurance in the exempt category rather than zero-rated may therefore limit the benefit for policyholders.
Some states have already raised concerns about revenue loss. Life and health insurance together contribute more than ₹10,000 crore in GST collections annually. A complete exemption would reduce government revenue significantly. Balancing revenue needs with consumer affordability will not be easy.
The intention behind the exemption is good: to increase access and make insurance more affordable for the middle class and vulnerable groups. Health insurance, in particular, is one of the fastest-growing segments and has become more essential after the Covid pandemic. Making it cheaper could encourage millions of new customers to purchase coverage and strengthen financial security.
But unless policymakers carefully address the issue of input tax credit, insurers will be forced to carry higher costs. This could weaken the very purpose of the exemption. A smarter solution may be to treat life and health insurance as zero-rated supplies, allowing insurers to continue claiming input tax credit while charging zero GST to consumers. Another approach could be to lower GST to 5% but still allow credit—balancing affordability with revenue protection.
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For consumers, what matters is whether their premiums come down in reality, not just on paper. If the exemption only results in small savings while insurers adjust their margins, the reform may fail to create the intended impact. At the same time, insurers need enough financial room to remain viable and continue investing in services, innovation, and customer outreach.
The debate shows that tax reform in insurance is not just about rates, but about structure and fairness. Insurance is not a luxury product—it is a necessity for financial security in a country prone to health emergencies and economic risks. The government must ensure that reforms genuinely lower costs for ordinary people, without damaging the industry’s stability.
In conclusion, GST reform for insurance must be approached with caution. A balanced framework can create a win-win—making insurance affordable for consumers while keeping the industry healthy. But if the exemption is designed poorly, the benefits may not reach the people who need them most. The GST Council’s upcoming decision will therefore be crucial in determining whether this reform becomes a genuine step toward wider insurance coverage or just another policy experiment with limited impact.
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